Many people seem to go their whole lives without once thinking about actually getting *out* of debt. But even if you do want to, it can be difficult. For most, the problem seems so insurmountable that they never try. And yet many have done so, and most use a simple technique usually referred to as the ‘debt snowball.’
[UPDATE: See Adam Baker's variation that he calls the Debt Tsunami over at his Man Versus Debt site!]
We tried this technique on more than one occasion but always managed to get derailed until we finally stumbled on a debt reduction plan that included the secret ingredient: the emergency fund. Yes, something as simple as that made all the difference in the world. Here are the basic steps:
First, you have to really want to do this.
Second, generate as much extra cash as you can (garage sales, etc.) for a lump-sum start.
Third, make nothing but the minimum payment on every existing debt each month. Take any extra money and put it toward #4
Fourth, put at least $1,000 aside as an emergency fund. This will insure that any surprise expense does not force you to pull out a credit card and derail your plan.
Fifth, once the emergency fund is established begin taking the extra money each month (from any income source or expense reduction) and put it all on one debt. Some recommend starting with the debt that has the highest emotional attachment (like money owed to a friend or family member). Others suggest starting with the lowest balance. When the first debt is paid off, take that monthly payment and add it in with the rest of the money and put it all on the next-smallest debt. This way each month’s total debt expenditure is the same. By the time you get to the last debt you’ll be paying as much as $1500/month on it.
When we finally got out of debt, it started when my car was paid off. We took that payment amount and started paying it on top of other existing payments. I also sold that car and bought an older used one, then used the difference to pay off the motorcycles and one other debt. When you become determined and you get creative things can happen rather quickly! We paid off my wife’s car and then, at long last, paid off my wife’s student loan! That thing had been pestering us for years!
Even if you have a mortgage left over, for all practical intents and purposes you are debt-free. But even though a house can turn from a liability to an asset given enough time, it still requires a lot of time, money and energy. Keeping a house as a home base during retirement is a much more traditional path, but early retirement does not require that you become house-free. If you have a lot of equity or own it free and clear you have more options available to you. If you are like us (see The Metamorphosis page) letting go of the house frees you to do whatever you want!
